Kotak Institutional Equities has reaffirmed its BUY recommendation on Life Insurance Corporation of India (LIC) with a raised fair value target of Rs 1,300 from Rs 1,260. The firm highlights LIC’s robust recovery in new business growth, resilient margins, and improved investment valuations, underpinning their positive outlook despite sector headwinds.

LIC’s Resurgent Growth and Elevated Valuations

LIC has reversed the recent decline in Annual Premium Equivalent (APE), posting a 9% year-on-year growth in 1QFY26, driven largely by stronger Unit Linked Insurance Plans (ULIPs) and bancassurance channels. Operating margins expanded by 144 basis points, boosting Value of New Business (VNB) growth by 21%. Despite challenges such as persistency issues and margin pressures from interest rate hedging, LIC’s core embedded value rises steadily. Kotak estimates a fair value of Rs 1,300 per share, implying significant upside from the current close of Rs 885. The stock trades at 0.6x FY2027E Embedded Value (EV), presenting an attractive entry point given an expected RoEV near 8.4% over the medium term.

Strong APE Growth and Product Mix Shift Bolster Business

LIC’s reported individual APE growth of 5% in 1QFY26 defies the previous two quarters’ declines, lifted by a strategic pivot towards higher ticket policies and an expanding ULIP portfolio which surged 115% YoY. This growth was further amplified by bancassurance premiums doubling to comprise 7% of new business premium (NBP). While traditional participating (par) product segments contracted, the firm successfully launched higher-margin products, such as the Jeevan Utsav line, enhancing profitability. The average policy size rose 23% YoY, reflecting focused efforts to drive value over volume.

Margin Resilience Despite Sector Challenges

LIC demonstrated a VNB margin of 15.4% in 1QFY26, up 144 basis points YoY, yielding a 21% increase in VNB. Margin expansion stemmed from product-level repricing and a reduced share of lower-margin participating products. However, Kotak projects margins will remain largely flat in the near term given increased expenses and the company's newly implemented interest rate hedging strategies, which may temper non-par margins. Nonetheless, cost efficiencies have driven an 8% decline in operating expenses YoY and a notable reduction of roughly 500 basis points in overall cost ratios, highlighting operational improvements.

Investment Portfolio and Valuation Upside

The market value of LIC’s investment portfolio rebounded to Rs 17 trillion in July 2025, up from Rs 15.6 trillion in May 2025. Kotak forecasts a substantial Rs 500 billion positive investment variance for FY2026E, benefiting from a recovery in equity markets and robust portfolio management. LIC’s embedded value stood at Rs 7,769 billion as of FY2025, expected to grow to Rs 9,585 billion by FY2027E. The firm values LIC at 1.1x core EV, applying a 50% haircut on the mark-to-market equity gains to derive a conservative intrinsic value framework.

Channel Dynamics and Persistency Trends

The agency channel, LIC’s longstanding distribution backbone, witnessed a muted 1.6% growth in new business premium with a declining share of 92.3% due to commission recalibrations and product shifts. Conversely, bancassurance grew impressively by 110%, albeit from a smaller base, supported by higher-margin ULIPs and annuity products. LIC’s agent force expanded by 4% in 1QFY26, expected to scale up productivity over time. Persistency rates declined across most cohorts, especially in the 13th to 49th month periods, driven by challenges in recent renewals and discontinued microinsurance lines. Management has introduced corrective measures including higher minimum ticket sizes and revised commission structures to improve persistency metrics gradually.

Medium-Term Outlook: Muted Growth but Stable Returns

Kotak projects subdued APE growth of around 4% YoY in FY2026E amid competitive pressures and structural channel shifts. Margins are expected to see modest 50 basis points year-over-year expansion to 18%, tempered by the cost of hedging non-par businesses. VNB growth is forecasted at 8% YoY, with operating RoEV stabilizing near 8.4% through FY2027-28E. The firm anticipates stable profit growth with earnings per share rising to Rs 80.1 in FY2026E and Rs 83.5 in FY2027E, supporting a comfortable valuation entry.

Investment Thesis and Risks

Kotak’s BUY rating is underpinned by LIC’s attractive valuation relative to embedded value and steady cash flow generation supported by product mix optimization and investment portfolio recovery. The company’s market-leading scale, expansive distribution network, and improving operational efficiencies provide a solid foundation for compounding growth. Risks include persistency weaknesses, regulatory changes impacting product design, and margin compression from hedging costs and interest rate fluctuations.

Bottomline for Investors

LIC demonstrates an impressive turnaround in new business growth aided by favorable product shifts and strong equity market valuations. Although near-term headwinds persist in cost and persistency metrics, the stock offers compelling value at current prices, trading well below embedded value with improving profitability. Kotak Institutional Equities’ price target of Rs 1,300 and BUY recommendation position LIC as a strategic buy for investors seeking exposure to India’s dominant life insurer amid evolving industry dynamics.